Supreme Court upholds IRD ruling against surgeons

A court battle is over for two surgeons who challenged Inland Revenue over claims they tried to avoid tax bills worth tens of thousands of dollars.

The Supreme Court has ruled unanimously against Ian Penny and Gary Hooper, saying they underpaid themselves from their own businesses to avoid the top personal tax rate.

The issue arose after the previous Labour-led Government raised the top personal tax rate to 39%, compared to the company rate which was then 33%.

The orthopaedic surgeons openly paid themselves a lower salary than the market rate, arguing that they had a choice about how they operated their business.

They tried to challenge a Court of Appeal decision that found in favour of Inland Revenue, which said the surgeons had paid themselves salaries too small to be commercially realistic.

It said they were therefore able to avoid paying the top tax rate, while the balance of their businesses' profits went as dividends to family trusts.

The trusts funded items such as a loan for one surgeon, and a holiday home for the other.

Inland Revenue said using those business structures to create artificially low salaries amounted to tax avoidance, saving each man between $20,000 and $30,000 a year for three years, beginning in 2002.

Mr Hooper told Checkpoint the court has created a salary benchmark that is higher than the one countless private practitioners have been using.

He says they have been following Inland Revenue advice and calculating their salaries based on public hospital rates.

An Inland Revenue deputy commissioner welcomed the ruling, telling Checkpoint it clearly states and reaffirms what the department's commissioner felt was the case all along. Carolyn Tremain says IRD has yet to fully absorb the implications and consequences of the ruling.

PricewaterhouseCoopers John Shewan, who appeared as a witness for the surgeons, said the case is important for individuals and firms. He said tens of millions of dollars may now be claimed by Inland Revenue from cases it still has open on this matter.